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Timbuk 3 Inc
Timbuk 3 Inc. has finished a new video game, Snowboard Challenge. Management is now considering its marketing strategies. The following information is available:
Anticipated sales price pr unit ................ $50
Variable cost per unit .................... $10
Anticipated volume .................... 500,000 units
Production costs ...................... $14,000,000
Anticipated advertising .................... 56,000,000
The cost of the video game, packaging and copying costs.
Two managers, Michele Woodard and Mark Hobson, had the following discussion of ways to increase the profitability of this new offering:
Michele: I think we need to think of some way to increase our profitability. Do you have any ideas?
Mark: Well, I think the best strategy would be to become aggressive on price.
Michele: How aggressive?
Mark: If we drop the price to $35 per unit and maintain cur advertising budget at $6,000,000, I think we will generate sales of 1,000,000 units,
Michele: I think that’s the wrong way to go. You’re giving too much up on price. Instead, I think we need to follow an aggressive advertising strategy.
Mark: How aggressive?
Michele: If we increase our advertising to a total of $8,000,000, we should be able to increase sales volume to 750,000 units without any change in price.
Mark: I don’t think that’s reasonable. We never cover the increased advertising costs.
Which strategy is best: Do nothing? Follow the advise of Mark Hobson? Or follow Michele Woodard’s strategy?
Expert Solution
Do-Nothing Strategy:
Revenue - Variable Costs - Fixed Costs = Profit
($50 × 500,000) - ($10 × 500,000) - $20,000,000 = Profit
$25,000,000 - $5,000,000 - $20,000,000 = $0
Thus, 500,000 units is the break-even volume.
Mark's Strategy:
Revenue - Variable Costs - Fixed Costs = Profit
($35 × 1,000,000) - ($10 × 1,000,000) - $20,000,000 = Profit
$35,000,000 - $10,000,000 - $20,000,000 = $5,000,000
Michele's Strategy:
Revenue - Variable Costs - Fixed Costs = Profit
($50 × 750,000) - ($10 × 750,000) - $22,000,000 = Profit
$37,500,000 - $7,500,000 - $22,000,000 = $8,000,000
Michele's strategy, which is to maintain the price but increase advertising, appears superior.
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